The output expenditure model has its roots in Keynesian economic theory. The equation economist John Maynard Keynes created to show an equilibrium between income and expenditure also has uses for small businesses across the country. Business owners can use the output expenditure model to express demand for goods in relationship to product output. This can help small business owners adjust product levels to better meet consumer demand.

Output Expenditure Definition

Output expenditure is a definition with two parts. Output is the expression of how much inventory your small business produces over a fixed period of time. Expenditure is how much money your small business spends in creating these products, including material costs, manufacturing prices and wages paid to workers. Your company's output expenditure varies by consumer demand for your products and total sales. The output expenditure model you produce for your small business is the expression of this cost-and-demand relationship.

Achieving Output Expenditure Balance

Attaining a balance between your output expenditure and consumer demand is the ideal for your small business. When there's an equilibrium in your output expenditure, this means you're creating products at 100 percent demand and you have no accumulating backlog of inventory. This allows your employees to continue to creating products at a steady pace and ensures you're meeting the demand for every customer who enters your business looking to make a purchase. Your output expenditure model expresses this equilibrium as the total of goods created versus the total number of goods sold.

Consequences of Low Demand

If your small business is experiencing low consumer demand, your output expenditure will show an increase in accumulated inventory over time. Accumulating inventory is a problem for your business because it represents costs your company has not yet recouped. Low demand and sales levels may force you to scale back your production schedules. This can result in fewer hours for your employees and an increasingly harder time meeting your company's other financial obligations, including business loans and equipment maintenance costs.

Problems with High Demand

While high demand demonstrates consumer desire for your goods, it can also cause problems if your small business is slow to react. In situations of high demand, your output expenditure model should show a deficiency in inventory versus consumer demand for your company's products. Failing to increase inventory levels by increasing production cycles or hiring more workers can cause your small business to lose consumers to other companies that can better meet product needs and demands for goods.

About the Author

Jonathan Lister has been a writer and content marketer since 2003. His latest book publication, "Bullet, a Demos City Novel" is forthcoming from J Taylor Publishing in June 2014. He holds a Bachelor of Arts in English from Shippensburg University and a Master of Fine Arts in writing and poetics from Naropa University.